The covered bond sector was a hot topic at this week’s Information Management Network Global ABS 2010 held in London.
Conference speakers touched on both the possibilities and limitations of this asset class, with the benchmark covered bond supply expected to reach around €150 billlion ($185.8 billion) to €175 billion this year.
These figures were presented by Ricardo Finelli, director in fixed-income structured finance at RBS during the panel titled The Relative Value of Covered Bonds versus Securitization as a Funding Tool.
Various speakers at the conference discussed whether the sector is a viable alternative to the securitization market.
At the same panel mentioned above, Tommaso Uslengthi, who is with securitization and risk transfer at Banca IMI, discussed the different features of covered bonds versus securitization.
Uslengthi said that covered bonds are dynamic pools, which are harder to manage. Being dynamic, the asset percentages could change and alter the life of the program. Aside from banks not having enough assets to feed their programs, a portion of the covered pool is also inelligible. There is also a higher linkage to the issuers' credit ratings.
By contrast, there are no limitations in terms of the banks that can access the securitization market. Securitizations being static pools require less effort to manage, Uslengthi said, adding that securitization is also a good way to match assets to their liabilities. However, Uslengthi did aknowledge that the market that is currently functioning is the covered bond sector, and not ABS.
According to Alexandre Trulli, head of debt capital markets at Natixis North America, these two markets could actually exist alongside one another.
The RMBS product was designed to offer extra yield to investors, Trulli said. On the other hand, covered bonds allow issuers to “go for very long-term funding,” he said.
These remarks were made at the panel called Covered Bonds: What is the Future for the Product?
Discussion on this panel focused on the different issues impacting the sector, including the European Central Bank’s euro-denominated purchase program that was announced in May 2009.
Panel participants said that one of the ECB’s objectives was to open the covered bond market up to make funding available to European banks, with the hope that by stimulating the growth of this asset class, there will be second-hand effects in other markets.
However, although it has been as a very effective buyback program, panelists do not expect it to be extended. They acknowledge that the regulatory endorsement helped just to “get things going.” However, the market, they said, has to start managing on its own without the ECB.
“The ECB added as a safety net,” Trulli said. “Secondary spreads would probably have spiked. With volatility up, the ECB alleviated the pressure in the secondary market.”
Panelists also discussed how covered bonds were treated under Basel III. The Basel Committee on Banking Supervision last December published a paper on liquidity risk and strengthening the resilience of the banking sector.
Covered bonds were given a 20% to 40% haircut. The Committee also included an overall 50% holding limit on covered and corporate bonds.
“Covered bonds deserve better treatment from a liquidity point of view,” said Ralf Grossmann, head of covered bond origination at Societe Generale Corporate and Investment Banking.
Although covered bonds offer diversification of funding as well as liquidity, panelists said that the sector was unfairly treated under the proposal.
As a result, “banks are forced to do government bonds,” Fernando Cuesta, head of funding at Caja Madrid.
However, when there are problems with the sovereign debt, investors will have to “sell their exposure to the country,” Cuesta said.
Thus, this situation would be no different from owning senior unsecured paper or covered bonds.